MUMBAI – Maruti Suzuki is aggressively growing its diesel-engine business in India, where a mix of subsidies, incentives and tax breaks have made diesel fuel 74% less expensive than gasoline. A year ago, the price differential was 25%.

The auto maker has absorbed its former joint-venture partner, Suzuki Powertrain India, thus gaining annual production capacity of 300,000 units at its Manesar manufacturing complex using Fiat’s small-diesel engine technology.

Maruti Suzuki also is spending Rs17 billion ($304 million) to add capacity for another 300,000 diesel engines at its Gurgaon plant by shifting car production to a new facility set to open in 2015 in Mehsana in Gujarat state.

The new plant in Gujarat also will have capacity to build 300,000 small- and medium-size diesel engines annually, thanks to an additional Rs40 billion ($715 million) investment.

The Gurgaon facility has capacity to produce 1.15 million gasoline engines a year as well. The expansion of diesel production brings Maruti Suzuki closer to its goal of a 50-50 ratio between gas- and diesel-powered cars; the current ratio is 70-30 in favor of gas powerplants.

“The Indian auto industry is shifting towards dieselization,” says Shinzo Nakanishi, Maruti Suzuki managing director.

Japanese parent Suzuki Motor had controlled 70% of the Suzuki Powertrain JV; the newly formed JV is 54% owned by Suzuki and 46% owned by Maruti. The realignment “will strengthen our company by giving us greater flexibility and longer lead time in meeting the changing market demand,” Nakanishi says.

The takeover amounts to a friendly swap of stock. Suzuki Powertrain is valued at Rs21 billion ($367.4 million), and it will receive Maruti Suzuki shares valued at Rs15 billion ($262.4 million).

The merger and fresh investment plans bring Maruti Suzuki’s entire annual diesel-engine capacity of 900,000 units under a single management. Analysts believe the merger will increase the auto maker’s net profits and operating margins.

The merger will result in “a lot of synergies between the companies that will boost our balance sheet, ” says Ajay Seth, Maruti Suzuki’s chief financial officer.